Wednesday, December 29, 2010

South Koreans worry too much about a free-trade deal

ON THE 38th parallel, a country that aims to be one of the world’s most open trading nations sits next to one of the most closed. That North Korea has deadly warheads aimed at Seoul means South Korea needs friends. But since the South gave in to American pressure to amend a free-trade agreement on December 3rd, many of its citizens have accused it of paying a high price for that friendship. Opponents of its president, Lee Myung-bak, playing on the mood of the moment, have likened the deal to being hit by North Korean artillery fire.

The government in Seoul insists that its desire for American support in dealing with North Korea never entered the free-trade equation. But whereas Barack Obama has used the agreement to burnish his pro-business credentials and win favour with some of his political opponents, in South Korea few are happy. In the National Assembly on December 7th both the ruling and opposition parties demanded an apology from the trade minister for breaking a promise not to tamper with the 2007 agreement, which has yet to be approved by either country’s legislature.

Choi Seok-young, the chief trade negotiator, admits the South Koreans reluctantly gave in to American demands but insists they got concessions. He expects a big political battle to have the updated agreement ratified. The Obama administration boasts that by postponing the elimination of American tariffs on South Korean cars and trucks, and winning concessions on safety and environmental issues, it has helped American carmakers. It also won the right to protect America’s carworkers from “harmful surges” of South Korean imports. South Korea’s main payoff was a miserly two-year extension of tariffs against imports of American pork. To the chagrin of some prominent Democrats in America, it also managed to stave off further pressure to reopen its market to American beef.

The tariff scorecard is only part of the story. South Korea exports far more cars to America than vice versa (see chart). Even Ford, the biggest-selling American carmaker in South Korea, barely sells enough in a month to fill a multi-storey car park.

Cheong In-kyo of South Korea’s Inha University says his country could still benefit immensely from the agreement. He says the amendments were necessary in order to ensure the deal’s passage by Congress. What’s more, he argues, the agreement will benefit South Korea by bringing competition into heavily regulated and inefficient service industries.

South Koreans may groan, but their trade negotiators are held in awe by their counterparts in countries like Japan, whose car industry competes fiercely with South Korean brands. Now that South Korea has an agreement with America to go alongside an earlier agreement with the European Union, it hopes to gain almost unrivalled access to the world’s two biggest markets. If that makes the South feel any more comfortable about the North, so much the better.
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